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The role of general counsel in electronic document preservation: Harkabi v. SanDisk Corporation

In our Electronic Discovery Updates, we have occasionally reported on decisions in New York in which federal or state courts have imposed sanctions for a party’s failure to fulfill preservation or production obligations relating to electronically stored information (“ESI”). Recently, in a case pending in the Southern District of New York, Judge William H. Pauley III issued a decision imposing sanctions upon a party for its failure to protect against the loss of ESI after a litigation hold had been implemented. The decision in Harkabi v. SanDisk, the latest in a continuing series of decisions relating to electronic discovery issued by judges in the Southern District of New York, suggests that in-house general counsel must be particularly vigilant about the preservation of ESI, even after the issuance of formal litigation hold instructions.

Background

In SanDisk, plaintiffs were two former employees of SanDisk who had been engaged in developing technology for use in flash drive memory products. SanDisk claimed that sales of the relevant products were lackluster and offered to pay plaintiffs only $800,000 out of a $4 million “earn out” escrow. When plaintiffs claimed that SanDisk had not fulfilled its marketing obligations and wrongfully had refused to credit plaintiffs for the use of their technology in one of SanDisk’s products, they were terminated. Plaintiffs then filed suit for the balance of compensation that they allege was owed to them. During their time working for SanDisk, the plaintiffs were issued laptops and corporate e-mail accounts.

Preservation Efforts

Once litigation was reasonably anticipated, SanDisk’s in-house counsel circulated four “Do-Not -Destroy” litigation hold memoranda and “instructed SanDisk’s Director of Global Operations to preserve the [plaintiffs’] laptops.” Acting on those instructions, the laptops were placed in a secure storage area. More than a year later, however, SanDisk installed a new Evault e-mail archive system and a helpdesk employee contacted SanDisk’s Director of Information Security to determine whether the plaintiffs’ laptops could be reissued to other employees after imaging and preserving the hard drive data. That request was forwarded to SanDisk’s in-house counsel and, according to the helpdesk employee, approved. The laptop drives were then imaged to a SanDisk file server.

Discovery

As discovery proceeded in the litigation, SanDisk began searching its file servers but was unable to locate the ESI from the laptops. The absence of certain documents in the production was noticed by the plaintiffs, who then made specific requests for copies of the laptop hard drives. During the course of inquiries about the ESI, SanDisk’s in-house counsel provided a declaration attesting, “I have no reason to believe that the four ‘Do-Not-Destroy’ Memoranda issued on April 12, 2007, were not fully complied with by SanDisk and its employees, temporary employees, and contractors.” SanDisk subsequently represented that “everything” had been produced and declined to produce copies of the hard drives, claiming that “all electronic documents from [the] hard drive[s] that are relevant to this dispute have already been produced.” Only months later, after plaintiffs searched the productions but failed to find materials they remembered being on their laptops, did SanDisk reveal that the actual laptops had been recycled and that it was unable to locate the imaged laptop data on its servers.

Additionally, plaintiffs’ review of the productions revealed that SanDisk had not produced many of the relevant e-mails that would have been in plaintiffs’ employee accounts. That omission was attributed to the new e-mail archiving system that was implemented only for current employees and that deleted any other e-mails from the active servers. “That [plaintiffs] were former employees subject to ‘Do-Not-Destroy memoranda appears to have been ignored.” Only once motion practice was brought did SanDisk undertake to search its backup tapes for the plaintiffs’ e-mail data. At the time of the SanDisk decision, the e-mails were expected eventually to be found and produced.

Analysis

In analyzing the type of sanctions that might be appropriate for the loss of laptop data and the delayed production of e-mails, the Court indicated that the operative questions were “whether SanDisk acted with a culpable state of mind and whether the missing evidence is relevant to [plaintiffs’] claims.” As to relevance, the Court concluded that the laptop ESI was relevant because it could have corroborated plaintiffs’ contentions about the design of SanDisk’s products that allegedly derived from plaintiffs’ work.

With respect to SanDisk’s state of mind, the Court concluded that “[a]t a minimum, SanDisk was negligent. . . . The undisputed facts reveal a cascade of errors, each relatively minor, which aggregated to a significant discovery failure.” Important to the analysis was the Court’s observation that “while SanDisk’s in-house counsel was involved at several steps of the document preservation and collection process, it was notably absent at critical junctures. In particular, SanDisk offers no direct evidence that in-house counsel supervised — or even approved — the copying and wiping of the laptop hard drives. No memoranda, e-mail or testimony corroborates the helpdesk employee’s assertion that in-house counsel authorized reissuance of the [plaintiffs’] laptops. Likewise, there is no evidence that in-house counsel was involved with the transfer of e-mail archives to the Evault system, when [plaintiffs’] e-mails were deleted from readily-searchable servers.”

Judge Pauley also took issue with SanDisk’s forthrightness in describing its productions, finding that it was inaccurate for SanDisk to have represented that its production was gathered “from the agreed-upon custodians” because the plaintiffs’ files were not actually included.

Sanctions

In fashioning a sanction for the spoliation of the laptop data, Judge Pauley indicated that the extreme sanction of termination was not warranted because there was no evidence of egregious conduct or intentional destruction. Recognizing, however, that “[p]laintiffs have lost access to relevant evidence,” the Court indicated that it “will fashion an adverse inference instruction to the jury after all the evidence has been received.” With respect to the anticipated late production of e-mails, the Court imposed a monetary sanction of $150,000, representing compensation to the plaintiffs for their added legal expenses and also to “deter SanDisk from taking shortcuts.”

Conclusion

The SanDisk decision is notable for the emphasis it places on the role of in-house general counsel during the pendency of a litigation hold. Although in-house counsel acted responsibly in issuing four litigation hold memoranda and providing specific instructions concerning the laptop computers of former employees, those instructions apparently were disregarded, forgotten or followed carelessly over a year later by Information Technology personnel who were making upgrades to the e-mail system and repurposing old laptops. This decision serves as a reminder that ESI is often subject to a litigation hold for long periods of time — typically longer than a corporation’s technology upgrade cycle. Measures should be taken to ensure that when technology within a company is upgraded or replaced, there is an appropriate procedure for interfacing with in-house counsel to ensure proper treatment of materials subject to pending preservation instructions. It is prudent to craft preservation instructions or policies so that general counsel may issue appropriate litigation hold instructions, and also avoid being “notably absent at critical junctures.” Additionally, it is a best practice for parties to document any requests or authorizations involving the moving or copying of data that is subject to a pending litigation hold. Most critically, the SanDisk decision demonstrates in two separate instances how the data of former employees is particularly susceptible to risk of loss. Parties should be especially vigilant about data preservation when a litigation concerns data generated by employees who have left the company.

It bears noting that a substantial portion of the SanDisk opinion is concerned with misrepresentations made during the discovery process about what had happened to the relevant sources of ESI and whether the document production was in fact complete. This repeats a common theme in many e-discovery sanctions decisions: a party’s overbroad or sweeping declarations about the completeness of their productions are found to be a material part of the party’s culpable conduct. Parties should exercise caution when making representations about the contents of their production, particularly if a potential data loss issue has arisen.

Finally, it is noteworthy that Judge Pauley’s decision calls attention to the fact that SanDisk “champions itself a leader in electronic data storage,” a fact that “raises an expectation of competence in maintaining its own electronic records.” This suggests that litigants who happen to be doing business in a technology-related area may face a somewhat higher standard of care in the fulfillment of their e-discovery obligations.